Wait – the Republican tax bill might do something good?

I hate to say it, but the Republican tax proposals, which would be generally horrible for most people if adopted in their current form, might actually do something good, although this will be entirely by accident.

My loathing for Republicans remains undiminished, I should mention, especially since they do so much to invite it. But it’s worth noting that at least one provision of the current tax programs in the House and the Senate (the bills differ in some important respects) could have an unambiguously positive impact on modern America. This is the provision that relates to the deductibility of interest expense in corporate taxes. Current tax law allows corporations to deduct interest expense against revenues in their income statement. The current tax proposals may limit this deduction, perhaps significantly.

The Republicans are considering this proposal for a simple reason–to raise funds to offset the general generosity of the bills being put forward, particularly towards the rich. Most of the proposals for revenue generation being considered will have negative impacts on most Americans–because most of them involve cutting spending on a wide range of programs like Medicare, that sort of thing–the programs that actually help people. Included in this bunch is, of course, the home mortgage interest deduction, which benefits Americans who own their homes–which is a pretty high percentage, higher than in most other countries. It’s a big country. If you itemize deductions, you often can claim a deduction on your home mortgage interest. But individuals are limited in the interest they can deduct other than that associated with mortgages.

Not that Republicans aren’t also going after the home mortgage interest deduction as well. The current House proposal, for example, will cap how much mortgage interest can be deducted; ditto for real estate taxes. Again, it’s the middle class that will be paying for the Republican generosity to the rich. Well, someone has to.

Businesses, on the other hand, currently can deduct all sorts of interest expense, and this can have a pretty major impact on reported earnings, not to mention corporate balance sheets. (This also, it should be mentioned, is a major factor in distortions of the tax system.) So what this does is actually encourage businesses to take on debt. This has been particularly true in America ever since the late 1970s, when Wall Street discovered the joy of debt-financed acquisitions. In fact, much of how the world looks these days can be attributed to the generosity of the folks who write tax legislation, who created the interest deduction in the first place. Because it has been this particular aspect of the tax code–coupled with the Reagan administration’s change in anti-trust enforcement that still persists–that has given us the modern corporate landscape.

During the past four decades we have seen wave after wave of mergers and acquisitions, some large, some very large, and the acquisitions have almost entirely been funded by borrowings. (Recently some large corporations have even been funding dividends from borrowings. Rating agencies take a dim view of this.) In sector after sector, especially in the US and in Britain–well, throughout the entire Anglosphere of the US, Britain, Canada, New Zealand and Australia–we have seen continued corporate consolidation, so that there are now only three or four of, well, just about everything. Companies buy other companies for all sorts of reasons–to expand product range, to attempt monopolistic pricing, to reduce competition, some good, some bad. But they keep buying each other, and this continues at a breakneck pace.

But all of this Merger & Acquisition (M&A) activity, which has been a gravy train for Wall Street since the 1970s, and has generated a raft of undeserving rich, is now under threat from the current tax proposals. Because these proposals target, among other things, the deductibility of interest expense by companies. This will have the effect of making large amounts of interest on debt more punitive than it is at present–because companies will lose the ability to deduct interest. As a result, corporate profitability will take a hit. And one likely result of this will be considerably less M&A activity.

As the FT article linked above has pointed out, Wall Street is fighting back, with some aggressive lobbying coming up. Quite a large number of people have been made pretty rich by helping companies buy other companies, and of course they feel threatened. They should. Because what the world doesn’t really need any more, if it ever did, is a bunch of bankers, in the name of “efficiency,” continuing to prey on the corporate landscape in search of deals that produce little in the way of economic gain, and yet manage to contribute much to the ranks of the unemployed. The cannibalization of America might actually, if not be reversed, at least be slowed down. Unless, of course, bankers can persuade Congress to let them continue their rapacity.